Lessons of a Real-Estate Fund's Fast Fall

For almost a decade, Phoenix Four appeared to be a rock-solid investment. The real-estate fund racked up double-digit returns for clients across Europe, including Cr&eacute;dit Agricole SA, Fortis Bank and Rothschild Bank. It claimed to hold more than $360 million in assets.

But in 2003, it collapsed: It stopped letting shareholders withdraw funds, prompting a legal imbroglio that continues to unfold. Among allegations in a lawsuit filed in federal court and a related arbitration matter: The fund suffered from a basic...